Savings Bond Transfers to Trusts Have Tax Consequences

Question:

Will the transfer of the Bonds to the trust create a taxable event?

Answer:

If series EE or series I U.S. savings bonds, owned by a cash method taxpayer who reported the interest each year, or by an accrual method taxpayer, are transferred because of death, the increase in value of the bonds (interest earned) in the year of death up to the date of death must be reported on the decedent's final return. The transferee (estate or beneficiary) reports on its return only the interest earned after the date of death.

If the bonds transferred because of death were owned by a cash method taxpayer who chose not to report the interest each year and had purchased the bonds entirely with personal funds, interest earned before death must be reported in one of the following ways: 

Form FS 1851 is used to reissue U.S. savings bonds (including Series EE bonds) to a “personal trust,” which includes a testamentary trust. When the form is filed, the bonds should be included with the form as indicated by the form instructions. Section 2 of Form FS 1851 requests the names of the grantors, trustees, taxpayer identification numbers, and beneficiaries of the trust. In general, the grantors would be any persons who transfer property to the trust and the trustees would be those persons identified in the trust instrument. The beneficiaries of a trust will generally include any living persons who may receive distributions from the trust.

Form FS 1851 is a publication of the Bureau of the Fiscal Service, rather than the Internal Revenue Service. For further clarification regarding the form, we suggest you contact the Bureau of the Fiscal Service, Forms Management Officer, Parkersburg, WV, 26106-1328, as indicated on page 5 of the form.